That masked man struck even harder than I had thought.
On yesterday’s post on income taxes in Illinois and other states, commenter Boris pointed out something I had missed. He stated what I had written about Illinois governor Pritzker’s proposal for the top marginal tax rate to be 7.99% and then added:
It’s worse than that. It’s 7.99% on all your income if your income is over that line.
So for a married couple, going from $999,999 to $1,000,001 (to be safe; not sure how exactly $1 million is treated) increases tax liability from $70,935 to $79,900.
I still haven’t figured out who thought it was a good idea to have a discontinuity in the assessed tax like that and why everyone played along.
This is so important that it deserves a post of its own.
First, thanks to Boris. I checked his math and he’s right. I did add the pennies.
So the 1,000,001th dollar that puts the married couple over the line causes the couple to pay $79,900.08 in income tax. That’s an increase of $8,965.08.
So the marginal tax rate on that 1,000,001th dollar would be 896,508%.
I’m guessing that in reality there are at least a couple of tax writers on the Democratic staff in Springfield, IL who would have seen this. What would have been interesting, though, and fortunately we won’t see it, would have been what they did when they discovered it.
READER COMMENTS
Don Dale
Nov 7 2020 at 9:34am
Well, as a taxpayer in Illinois I can tell you that the current tax code contains similar marginal tax rate cliffs, though none quite as big as that one. For example, Illinois allows a tax credit of 5% of property tax paid on one’s principal residence (with no maximum). But this credit disappears if AGI is above $500,000 (married) or $250,000 (single). So a taxpayer paying $25,000 in annual property tax — and they’re easy to find in Illinois — has a tax credit of $1250. But the minute you go over that AGI threshold, you lose the credit entirely.
There’s a similar tax credit for K-12 education expenses that also goes away at the same AGI threshold.
So the current marginal tax rate on that taxpayer going from earning $250,000 to $250,001 is 175004.95%.
David Henderson
Nov 7 2020 at 12:14pm
Wow! Thanks.
So I take it that the K-12 credit is $500?
Don Dale
Nov 8 2020 at 7:56pm
Yes, it’s 25% of education expenses over $1000, with a maximum credit of $500.
cosinedLoan
Nov 7 2020 at 3:31pm
This is a general problem to any credit that doesn’t have a phase out range. Even with a phase out range, the marginal tax rates can easily exceed the rate for the highest bracket of a progressive tax code.
A lot of people don’t know their true marginal tax rate, just the one published for where their taxable income # falls. With all the deductions/credits/phase out ranges, you’d have to use tax software or a pretty built-out Excel sheet to ‘shock’ your income up and down by a small amount to empirically determine your marginal tax rate on your next dollar of employment income/self-employed income/IRA conversion/cap gains÷nds/etc…
Economist like to say incentives matter, but when it comes to people’s responsiveness to the tax code I think incentives will only matter if one is actually aware of the real incentive/tax structure.
Chris
Nov 7 2020 at 4:08pm
Oh, thank god we saved those millionaires from a $9,000 increase in taxes at a very specific threshold. We all know they would have missed that money terribly.
you can pick apart the oddities of a tax law… or you can look at the implication overall, which is that we’re one step further away from being able to balance our budget.
MarkW
Nov 7 2020 at 7:09pm
I think you’re right that the sudden discontinuities aren’t the big deal. The big deal would have been that 7.99% rate (on top of high property and sales taxes). What’s the marginal tax decrease for a family earning $999,999 in Illinois when they go on to earn $1,000,001…in Florida or Texas?
David Henderson
Nov 8 2020 at 2:43pm
Good point.
And my higher math skills tell me that the answer to your question is:
$79,900.08.
And that’s just on the income tax side.
Vince l
Nov 8 2020 at 11:27am
The bottom line is it isn’t your money…you didn’t earn it and have no rightful claim to it. Do wealthy people use more government services than poor or middle class people? No I don’t thnk they do and in fact probably use less. At the very least if you want the rich to pay more…fine…then the fair thing to do is raise everyone’s taxes…which I am also opposed to but I believe we are all in this together…class warfare doesn’t do it for me
David Seltzer
Nov 9 2020 at 4:58pm
What if it was the next fifty cents or anything approaching zero? Zeno’s Paradox? This is the conundrum of discrete and continuous mathematics.
Mike Davis
Nov 10 2020 at 4:58pm
The marginal rate on dollar $1,000,001 was 895,508% but the marginal rate on dollar $1,000,002 was 7.99%. Right? Both are too high and almost certainly a mistake in drafting.
But what about a tax code the embraced the discontinuities? Maybe make the marginal rate above $1,000,001 zero. Is there such a thing as a progressive pole tax? What would you call a tax schedule that looked like this?
Income: $0-$50,000, Tax Bill: $0
Income: $50,001-$100,000, Tax Bill: $5,000
Income: >$100,000, Tax Bill: $15,000
Thought experiment: Suppose I told you that a state had a traditional progressive income tax with three levels and that a static analysis showed a shift to the system given above would generate the same level of revenue. Would we expect to see more work effort and a reduction in dead weight loss?
I’ve never taught public finance and don’t know much about it. But surely somebody’s thought about this before.
David Henderson
Nov 11 2020 at 2:53pm
You wrote:
Change the tense from “was” to “would have been” and the answer is yes.
You wrote:
I agree that both are too high but I’m pretty sure the 7.99% rate is not a mistake in drafting.
You wrote:
To answer that, I would need to know the details of the “traditional progressive income tax” it replaces.
One clearcut result, though, is a whole lot of people making $48K to 50K, a whole lot making $98K to $100K, few people making $50,001 to about $58,000, and few people making $100,001 to about $125,000.
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